Dividend per share (DPS) indicates the amount that shareholders will receive in dividends for each security. Investors can use this figure to calculate the dividends they will receive on the upcoming payment date or over the course of a year. Typically, this refers to cash dividends. However, the concept of DPS is also applicable in the case of stock dividends.
This article will discuss the dividend formula used for dividend calculation. We will also explore how DPS can be used in investment analysis.
Table of Contents
What Is Dividend Per Share?
Dividend per share definition: it is the value obtained by dividing the total amount of dividend distribution by the number of shares outstanding.
The DPS meaning is that this financial ratio shows the amount a shareholder will receive per stock with the company’s earnings distribution. The share calculator uses this as one of the criteria for determining shareholder returns.
A common question from beginner investors is: ‘How to find dividend per share?’ The answer is to multiply DPS by the number of shares the shareholder owns.
The Dividend Per Share Formula
Now, let’s consider how to calculate the DPS. The basic formula for dividend calculation is as follows:
Dividend per share = Total Dividends ÷ Outstanding Shares
If the company pays dividends several times a year, it may be difficult to use the DPS formula. Therefore, we will examine its components in detail and calculate dividends paid.
Components of the DPS Formula
A common question: ‘How to calculate annual dividend per share using the basic formula?’
The total dividends paid out over the course of the year consist of both regular and special dividends.
The total number of common stock held by shareholders is known as the outstanding shares. This share count includes securities owned by insiders, institutional investors and private investors. Treasury shares are not included in the calculation. The number of outstanding shares can be found in the company’s balance sheet.
When it comes to preferred dividends per share (DPS), to calculate dividend it is necessary to divide the total amount paid to preferred shareholders by the total number of preferred shares.
It is also possible to determine how much income is generated by preferred shares by using the dividend rate and the nominal value of the securities. Annual preferred dividend per share formula:
Preferred dividend = (Dividend rate ÷ 100) × Par value for the preferred stock
Basic DPS Calculation Example
Let’s look at how to find annual dividend per share using an example. Suppose a company made 4 quarterly payments of $1 million each. The annual dividend would be $4 million ($1 million × 4). If the company has 5 million outstanding shares, the annual DPS is $0.8 according to dividend maths.
To calculate the quarterly dividend, simply divide the payment amount by the number of shares. In our DPS example, this would be $0.2 ($1 million ÷ 5 million).
The simple calculation of annual dividends described above does not apply to growing companies. Such businesses often pay unstable dividends. Therefore, it is better to sum all payments rather than multiply the amount of one distribution by their number.
Advanced DPS Calculations
Sometimes, calculating dividends for the year can be more complex than in the above example. The first issue is special dividends. If the company has made these types of payment, they must be added to the regular dividends.
The second important point is dividend adjustments in the event of stock splits. In order to calculate the adjusted DPS, the weighted average shares must first be determined.
Adjusting for Stock Splits and Buybacks
Company’s share count changes occur as a result of stock splits, consolidations, and share buybacks. To find the adjusted dividends for the year in such cases, it is necessary to calculate the denominator value:
Outstanding Shares = (Beginning Shares Outstanding + Ending Shares Outstanding) ÷ 2
Following a stock split, it is common practice to recalculate the historical DPS based on the new share count.
Share buybacks have a positive effect on the amount of DPS. These lead to an increase in shareholder returns. Reducing the number of outstanding shares increases earnings per share and dividends paid.
Interpreting Dividend Per Share
When conducting a dividend analysis, the following aspects should be considered:
- dividend growth over time;
- payout sustainability over decades;
- payout ratio trends.
The market may interpret similar dividend trends in different ways. For instance, an increase in shareholder rewards could be viewed as an indication of management’s confidence in future profits. However, it could also be interpreted as an indication of limited expansion opportunities for the business.
While performing yield analysis before purchasing shares, it is also necessary to calculate dividend yield. Comparing it to the historical average level provides an indirect indication of whether the stock is undervalued or overvalued.
DPS Growth Over Time
The dividend growth rate over a given period is calculated using the following formula:
(Ending Dividend / Starting Dividend) ^ 1/n − 1, where n is the number of years.
This indicator helps us understand whether the company can maintain a growth trend in passive income that outpaces inflation.
Consistently increasing dividends are an indication of a business’s financial health. A stagnating or declining DPS is considered a warning sign.
Dividend aristocrats and kings pay the most consistent dividends. They have a dividend history of over 25 or 50 years of consistent growth.
DPS in Relation to Other Metrics
In addition to the DPS, consideration should be given to the following financial ratios:
- Dividend yield. This relative valuation depends on the current share price. Dividend yield = (Annual dividends per share ÷ Current share price) × 100
- Payout ratio. This indicates the proportion of a company’s net income that is received by its shareholders. It may exceed 100% if payments are made using retained earnings from previous years. Dividend payout ratio = (Total dividends paid ÷ Net income) × 100
- Earnings per share. This is calculated by dividing the net income by the number of shares outstanding. This ratio can be found in income statements.
- Dividend coverage ratio. This shows how many times a company can pay dividends from its profits. (Net income – Preferred dividends) ÷ Total common dividends paid
Common Mistakes When Calculating DPS
The most common calculation errors made by beginner investors are:
- misunderstanding the difference between outstanding vs. issued shares;
- missing special dividends when determining the annual payout;
- ignoring stock splits instead of calculating adjusted figures for the share count.
It is also important to use reliable sources of accurate data on company metrics.
The most frequent mistake when it comes to preferred shares is using the market value instead of the nominal value when calculating dividends.
Real-World Examples of DPS Calculation
Let’s demonstrate how to find the dividend per share (DPS) using the Coca-Cola (KO) company example. Real calculations of dividend stock cash flows look like this:
- for 2024, the company paid $8.4 billion to shareholders;
- the number of shares outstanding on January 1, 2024 – 4.328 billion;
- the number of shares outstanding on December 31, 2024 – 4.308 billion.
Using the formula above to calculate dividends will give a result of $1.94.
Information on blue-chip dividends and dividend aristocrats is readily available from specialist services such as BeatMarket, as well as in financial statements. In practice, the ability to calculate dividends is particularly important for investors working with small businesses.
The Bottom Line: Using DPS in Investment Decisions
When building a dividend portfolio of income stocks, an investment strategy should consider more than just the size of dividends. Informed decisions should be based on companies’ financial metrics, revenue and profit dynamics, and their debt-to-equity ratio. It is also important to consider the potential for maintaining and expanding market share in future, as well as the industry’s overall outlook.
Dividend investing is often a key part of retirement planning. The current payout size is less important as an indicator than the growing DPS rates and their stability.
FAQ
How is dividend calculated on shares?
To calculate dividend per share, you need to divide the amount paid to shareholders by the number of outstanding shares.
How much to make $1000 a month in dividends?
A portfolio with a dividend yield of 4% requires an initial investment of $300,000. This will generate an annual income of $12,000. To ensure payments are made evenly each month, it is important to select stocks carefully.
What is the formula for dividend sharing?
DPS is determined by the following formula: dividend amount ÷ number of shares outstanding.
What is meant by 20% dividend?
A dividend yield of 20% means that, over the next 12 months, an investor will receive payments totalling 20% of the current stock price. If a company allocates 20% of its profits as dividends, shareholders will receive 20% of that company’s profits.
Article Sources
- Fama, E. F., & French, K. R. (2001). “Disappearing dividends: Changing firm characteristics or lower propensity to pay?” Journal of Financial Economics, 60(1), 3-43.
- DeAngelo, H., DeAngelo, L., & Skinner, D. J. (2004). “Are dividends disappearing? Dividend concentration and the consolidation of earnings.” Journal of Financial Economics, 72(3), 425-456.
- Bhattacharya, S. (1979). “Imperfect information, dividend policy, and ‘the bird in the hand’ fallacy.” The Bell Journal of Economics, 10(1), 259-270.
- Baker, M., & Wurgler, J. (2004). “A catering theory of dividends.” The Journal of Finance, 59(3), 1125-1165.
